January 28, 2006

Wow, Baby Universe Bought PoshTots.com for $12 Million

The Richmond-based PoshTots caters to--now let me see if I can remember their explanation correctly--rich, bored pregnant women on bedrest with laptops, is that right? Well, clearly, it's a growth market, and it's attractive enough to the decidedly more middlebrow Baby Universe [amex: BUN], for them to pay 1.6x revenue and almost 12x earnings, in a deal that mixed cash {$6mm), debt ($6mm note), stock (237k shares = $2mm), and warrant (110K at $8.10, = $0 on the day the deal closed, Jan. 13).

Some interesting factoids for the number crunchers out there:

PoshTots revenue grew 43% in 2005 to $7.0 million, with an "annualized pace of growth" for the last 5 months of $8.35mm, annualized EBITDA [operating income] of $1.2mm, and gross margins of 43%. That's a lot of apples and oranges, frankly, but breaking it down means that they were selling an average of $500K/mo. for the first seven months, and $700K/mo for the last five months of the year. That compares to $4.9mm, or an average of $408k/mo for 2004.

PoshTots' 43% gross margin is much higher than BUN's 25%. As for operating income, BUN's been running operating losses for two of the last three years, thanks, it seems, to rather steep advertising costs, which may, in fact, be affiliate marketing costs, commissions paid to sites who drive its sales, and that's not likely to go away, or to decrease as a % of sales. Along with DreamtimeBaby.com last fall, BUN's now bought two smaller, ultra-low overhead, profitable online retailers, each of which netted about $1mm last year. It sounds like BUN's trying to buy margin.) What's interesting is that they paid nearly twice as much for PoshTots as they did for the comparably sized Dreamtime, and the price was still below what the market valued BUN at. [1.5x revenue vs. 2.2x rev., $20mm sales and a market cap of $47 mm] That's some liquidity discount.

Other PoshTots factoids, though: their average order is reportedly $500, which I assume translates to 1,000 customers/month. That average includes $47,000 Cinderella carriage beds and $36 tole painted nursery doodads, with far more of the latter than the former. [A couple of carriage beds would spike that average pretty quick. If they paid retail, for Leni's "Gingerbread Cottage Bed," Seal & Heidi dropped around $10k. Hypothetically, the jump in 4Q05 sales could be all Seal, Pete Sampras and Dylan McDermott's doing. How's that for a business model?]